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S&P Analysis Was Flawed by $2 Trillion Error, Treasury Says

Aug. 6 (Bloomberg) -- Standard & Poor’s decision to
downgrade the U.S. credit rating was flawed by a $2 trillion
error, according to a Treasury Department spokesman.

S&P lowered the nation’s AAA grade one level to AA+
yesterday, after warning on July 14 that it would reduce the
ranking in the absence of a “credible” plan to lower deficits
even if the nation’s $14.3 trillion debt limit were lifted. The
outlook was kept as “negative.”

The Treasury disagreed with S&P’s assessment because the
analysis was carried out hastily, said a person familiar with
the matter who declined to be identified because the discussions
were private. The ratings firm erred in estimating discretionary
spending levels at $2 trillion higher than Congressional Budget
Office estimates, the person said.

S&P, in a statement, disputed the Treasury’s assertions and
said using the department’s approach to the CBO figures didn’t
affect the ratings decision. The Treasury’s $2 trillion figure
was derived by calculating government debt over a 10-year period,
S&P said.

“Our ratings are determined primarily using a 3-5 year
time horizon,” S&P said in the statement. When projecting
government debt through 2015, the discrepancy between the
Treasury’s approach and S&P’s approach to the CBO figures
amounts to $345 billion, the ratings firm said.

“The primary focus remained on the current level of debt,
the trajectory of debt as a share of the economy, and the lack
of apparent willingness of elected officials as a group to deal
with the U.S. medium term fiscal outlook,” the firm said.
“None of these key factors was meaningfully affected by the
assumption revisions to the assumed growth of discretionary
outlays and thus had no impact on the rating decision.”

Moody’s, Fitch

The S&P decision went further than Moody’s Investors
Service and Fitch Ratings, which affirmed their AAA credit
ratings for the U.S. on Aug. 2, the day President Barack Obama
signed a bill that ended the debt-ceiling impasse that pushed
the country to the edge of default. Moody’s and Fitch both said
that downgrades were possible if lawmakers fail to enact debt
reduction measures and the economy weakens.

Steven Hess, a senior credit officer at Moody’s in New York,
said at the time that while the compromise between Obama and
members of Congress was “a positive step” toward reducing the
deficit, “we do think more needs to be done.”

S&P, in its earlier statement explaining the downgrade,
said that the deficit-cutting plan signed by Obama after months
of wrangling with Congress falls short of what “would be
necessary to stabilize the government’s medium-term debt
dynamics.”

U.S. Politics

After being alerted to that, S&P lowered its calculations
by $2 trillion and then relied largely on judgments about U.S.
politics to support the downgrade, the person said. The Treasury
was presented with the S&P analysis shortly before 2 p.m.
yesterday.

S&P said in its statement that it may lower the long-term
rating to AA within the next two years if spending reductions
are lower than agreed to, interest rates rise or “new fiscal
pressures” result in higher general government debt.

The wrangling over raising the nation’s debt ceiling
indicates that “further near term progress containing the
growth in public spending, especially on entitlements, or on
reaching an agreement on raising revenues is less likely than we
previously assumed and will remain a contentious and fitful
process,” S&P said.

S&P currently gives 18 sovereign entities its top ranking,
including Australia, Hong Kong and the Isle of Man, according to
a July report. The U.K. which is estimated to have debt-to-GDP
this year of 80 percent, 6 percentage points higher than the
U.S., also has the top credit grade. In contrast with the U.S.,
its net public debt is forecast to decline either before or by
2015, S&P said in yesterday’s statement.

New Zealand is the only country other than the U.S.
that has a AA+ rating from S&P and an Aaa grade from Moody’s.
Belgium has an equivalent AA+ grade from S&P, Moody’s and Fitch.